Here appear occasional jottings of my random musings. Profound or jejune, they reveal the contours of my mental universe, with world history, intellectual history, civilizations, philosophy, religion, society, knowledge, and books as some major themes.
Since May 2011, this blog has been exclusively focused on Singapore. All my other reflections are now posted in "Notes from Noosphere" (see link under "Miscellany" on the right margin).

Tuesday, November 6, 2012

Prof Lim Chong Yah is Singapore's moral conscience: Prof Tommy Koh

Prof Tommy Koh is chairman, Centre for International Law, NUS, and Special Adviser, Institute of Policy Studies.

Prof Lim Chong Yah (see below for ER II details)

PROFESSOR Lim Chong Yah is one of Singapore's most distinguished economists. He was the professor of economics at the National University of Singapore (NUS), before moving on to the Nanyang Technological University (NTU) to become the first Albert Winsemius Professor of Economics.He is currently Emeritus Professor of Economics of both NUS and NTU.Prof Lim is both a scholar and practitioner. He was the founding chairman of the National Wages Council (NWC), a post which he held for more than 30 years. No one has contributed more to the success of this unique Singapore institution than he. In view of his credentials and track record, we should study carefully his three proposals for a more inclusive Singapore wage policy.Prof Lim proposes:- that the NWC should continue with the issuance of a quantitative wage increase guideline for those earning less than $1,000 to $1,500 a month, over the next two years;- that the NWC should call for an across-the-board temporary three-year moratorium of salaries of top executives earning more than $1 million a year, both in the private and public sectors;- and that should the wages of the lowest-paid resident workers remain stubbornly very low in two or three years' time, serious consideration be given to introducing a compulsory minimum wage scheme with, say, $1,000 a month as the start-off quantum. Freezing salaries at the topWHY is Prof Lim asking for a freeze, for three years, of salaries above $1 million a year?I think he has done so because our growing income inequality is due to the inflation of salaries at one end of the spectrum and the deflation of salaries at the other end. His objective is to raise the wages at the bottom and slow down the escalation of salaries at the top.Is it wrong for Prof Lim to interfere with the market and to urge restraint?I do not think it is wrong.Having served on the board of directors of two publicly listed companies, I have observed that in recent years, we have been looking to the West for inspiration when it comes to the compensation of our chief executive officers and other key personnel in senior management.I do not think it is wise to look, for example, to America for inspiration, because the American culture is very individual-centred, whereas our culture is more communitarian.One consequence of the American model of capitalism is the Occupy Wall Street Movement and the increasing polarisation of American society and politics between the 1 per cent and the 99 per cent. We do not want to import such trends, which Americans themselves are so worried about, into Singapore.Consider the following facts extracted from Professor Michael Sandel's book, Justice: What Is The Right Thing to Do? In 1980, the average CEO in America earned 42 times more than the average worker. In 2007, the average CEO earned 344 times more than the average worker.During the period 2004 to 2005, the average CEO in top companies in the US, Europe and Japan earned US$13.3 million, US$6.6 million and US$1.5 million respectively. Japan, like Singapore, has a communitarian culture and is a better role model for us than the US or Europe.I would also call attention to what Conservative British Prime Minister David Cameron said recently when he opposed the payment of extravagant salaries and bonuses in the financial industry in London.He said that there was an incestuous element in the composition of boards. As a result, there was a certain "I scratch your back, you scratch my back" phenomenon at work.I think that his comment is probably applicable to Singapore, where the talent pool is smaller, and the same people serve on multiple boards.I also suspect that there is an unspoken competition among some of our leading companies to see whose chief executive officer will receive the highest salary. We would actually be more impressed if the competition is to see which company will pay its workers more.I, therefore, sympathise with Prof Lim's proposal to slow down the escalation of the salaries at the top. I do not, however, think that his specific proposal will be accepted by the NWC.I suspect that the NWC would focus on raising the wages at the bottom and not interfere with the wages at the top. Singaporeans, especially those at the top, should, however, reflect deeply on Prof Lim's proposal and on their responsibility to society. Raising wages at the bottom I SUPPORT Prof Lim's proposal that the NWC should continue with the issuance of a quantitative wage increase guideline for our low-wage workers for the next two years.A one-time increase of $50 will not have a significant impact on the lives of the low-wage workers. However, a $150 increase, over three years, would be more impactful.I agree with Prof Lim that if the situation does not improve in two to three years' time, we should seriously consider introducing a minimum wage. We know from the experiences of Japan, South Korea, Taiwan and Hong Kong that the introduction of the minimum wage did not increase unemployment or frighten away foreign investors in those jurisdictions.Hong Kong introduced the minimum wage one year ago. According to a report in this newspaper last month, the Hong Kong experience has been a positive one. There was no increase in unemployment and no decrease in foreign investment. In fact, unemployment remained low and there was an increase in the number of new businesses. The minimum wage has raised the income of over 140,000 low-wage workers.In conclusion, I wish to thank Prof Lim for being our moral conscience. He has reminded us that our mission is to achieve growth with equity. Our ambition is to build a fair and prosperous Singapore. What we have achieved so far is a prosperous but unfair society.Prof Lim has warned us that we have deviated from our original path and that we are dangerously close to a point when our inequality could adversely affect our cohesion and harmony.

(2) A portion of the wage increase went to CPF through increases in employers’ and employees’ contributions;

(3) Another portion of the wage increase, 4% of wages below a certain level, went to a newly-created tripartite-run Skills Development Fund;

(4) The new Skills Development Fund Advisory Council oversaw the administration of the Fund with twin objectives

(i) Substantial across-the-board subsidy for training and retraining of employees at all levels opened to all employers in Singapore.

(ii) A common-playing-field substantial subsidy for the mechanization of the production processes opened to all employers in Singapore.

Need and Objective of ER I

The overall objective of the restructuring exercise was to move the old traditional economy from a low-skilled, low-value-added and highly-labour-intensive structure to a high-skilled, high-value-added, and more technology and more knowledge-based new economy. The need for restructuring was urgent in view of increasing competition from new emerging and developing economies in East Asia particularly following the opening-up and the robust new industrialization programme of the People's Republic of China since 1978.

Five-Point Observations on ER I

Five general observations of the first formal economic restructuring exercise (1979-81) will be made here.

(1) It was self-funded, or strictly speaking, funded by the employers, not by the Government through higher taxes or from quantitative easing, or from accumulated reserves or otherwise.

(2) The exercise was very focused with only one Government-appointed tripartite agency, the Skills Development Fund Advisory Council, overseeing the exercise.

(3) The “means” for the restructuring objective was also much focused. The means were only two: one, mechanization, that is, the substitution of capital for labour, and two, training and re-training of workers, particularly technologically replaced workers.

(4) Even the training and mechanization programmes were highly focused: mechanized and trained to meet the anticipated demand of the employers; not training for the sake of training and mechanization for the sake of mechanization.

(5) Lastly, the modus operandi was through inducement, incentives and disincentives programmes, and not direction. Market forces were given a full reign. The Skills Development Fund was merely providing the direction, the support, the philip and the accelerator. The SDF merely provided the GPS.

Success of ER I

Despite some teething problems, the then considered bold and iconoclastic restructuring exercise was a great success. Real GDP displayed high real growth rates of 9.4% in 1979, 10.0% in 1980 and 10.7% in 1981. After 1981, the built-in restructuring momentum continued unabated until the regional recession year of 1985.

Subsequent Low-Wage Labour Import

Since 1985, fearing that the Singapore economy would become internationally uncompetitive, we gradually and imperceptibly eased the moratorium on the intake of lowly-paid, lowlyskilled foreign labour. Non-resident labour force increased steadily from 300.8 thousand in 1991 to 1.157 million in 2011, as shown in Diagram 1, which is based on published official statistics. GDP, as expected, expanded pari passu, as impressively as the inflow of lowlypaid foreign labour. Non-resident labour is cheap. Out of the 1.157 million non-resident work-force in 2011, only 1.7% earned wages high enough to pay income tax. The rest, the majority 98.3%, did not earn high enough to fall into the income-taxable bracket.

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Increasing Supply of Non-resident Labour Force (‘000)

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It cannot be over-stated that successful economic restructuring can only take place with a moratorium on cheap labour import. There is, as you know, an unlimited supply of lowlypaid foreign labour in our region. One cannot substitute capital for labour, if labour is cheap.

That was why the NWC in 1979 recommended a cumulative 20% increase in labour cost per year for the restructuring years of 1979-81.

Adverse Impact on Domestic Wage Rates

Below is a simplified diagram to illustrate this often forgotten simple principle of price in relation to supply and demand. Diagram 2 shows that an increase in the supply of labour, ceteris paribus, brings down the wage rate from W0 to W1.

Do we need another economic restructuring now in 2012, as opposed to the one we had in 1979, 33 years ago? Political, economic and social conditions then and now differ strikingly. Our per capita income then in 1979 was US$4,071, one of the lowest in the world and in 2011, US$50,123, one of the highest in the world. The level of technological advance too has been dramatic, from, for example, as shown in Diagram 3, a coolie carrying a bag of rice at his back in a tongkang at the mouth of the Singapore River to one of the first-rate, worldclass containerized ports in the world. Then, we had a reservoir of untapped, under-utilized and mis-utilized domestic labour force with a very low participation rate of female labour. Now the female participation rate has become so high that the real problem and the realcasualty is the serious decline in family formation, which is a pointer to our future succession, population renewal and survival.

However, the distinguished presiding Chairman of this meeting, Mr Ho Kwon Ping, said not too long ago that Singapore needed another wage revolution to complete the 1979-81 successful wage revolution. He added that the first wage revolution had been most successful only in the manufacturing sector, but not in the other sectors, such as in the construction industry, the retail trade sector and the household sector. We all are aware now that we have 1.157 million non-resident workers, not like in 1979. However, I must hasten to add that I am thankful that these foreign workers have chosen Singapore to work, instead of other countries, and that it is not their fault or shortcoming that our employers, out of sheer necessity, have chosen to employ them to work here in Singapore.

Increasing Income Inequality, another Achilles’ heel

In recent decades, consequent on globalization and technological advance in a largely market-oriented global economic system, the world economy, particularly in advanced and emerging economies, has been faced with increasing and disconcerting income inequality.

Much of the research work in this field has been very ably done by the OECD, the IMF, and the World Bank and by the ILO. In Singapore, the twin pulls of income inequality have taken on the pull away from the centre by both the lowest-income and the highest income groups, pulling away from the centre at both ends in the opposite directions by the two groups. The global contagion forces pull up the highest income groups whilst the increasing inflow of much cheaper foreign labour pulls down the lowest income groups. Singapore’s fairly bad Gini-coefficient, as shown in Diagram 4, thus exacerbated further from 0.454 in 2001 to 0.473 in 2011. The P90/P10 index, another frequently used measure of income inequality, increased from the already high index of 8.58 in 2001 to 9.19 in 2011, as shown in Diagram 5.

A Gini-coefficient of 0.5 is normally considered a dangerous line to reach, far less to cross, and we have reached 0.473, according to official estimates, in 2011.

On Singapore’s increasing Gini Coefficient in the last decade or so, it may interest you to note that in 1985, when the Third Edition of one of our best-selling Economics College Texts “Economic Structure and Organisation” was written, the Gini Coefficient, as shown on page 303 in Chapter 8 “Income Distribution”, actually showed a declining tendency, reaching 0.422 by 1980, as opposed to the present 0.473. Individual and company income taxes then were much higher and there were inheritance taxes. There was no GST then. Besides, NWC was recommending quantitative guidelines with dollar quantum favouring the lower income groups in percentage terms.

Solution to Problems of the Two Achilles' Heels?

As a solution to the new problems of increasing income inequality and the excessive reliance on cheap foreign labour import, I would like to propose Economic Restructuring II operational for three years, with the following six features.

(1) Sizable Pay Increase for Lowest Income Workers

One, that all workers’ pay below $1500 per month be cumulatively increased by 15% in year one, 15% in year two and 20% in year three. This increase is applicable to all workers, local or foreign, if he or she draws a pay of less than S$1500 per month. A dollar quantum is also to be included in the increase pay package.

(2) Part of Pay Increase to SDF and RA

Two, that one third of the increase pay package be channelled to the Skills Development Fund, one-third in the form of take-home pay and the other third to CPF Retirement Account (RA). For foreign workers, it will take the form of ex-gratia payment upon leaving Singapore on expiry of tenure. The SDF should be re-activated, re-vitalized and re-invigorated to perform the functions of (1) training and re-training of workers, (2) mechanization and technological upgrading and (3) better employment of labour through re-designing in labour use. The restructuring momentum has to be re-generated and sustained. The buzzwords should continue to be “use one worker instead of two”.

(3) Moratorium on Pay of Highest Income Groups

Three, those who receive $15,000 a month or more will have their wages or salaries frozen for three years only during former Economic Restructuring II. There is no proposal for a pay-cut or a pay-ceiling or super-taxes for high-flyers, only a moratorium on pay increase for three years. The intention is not to frighten the geese that lay the golden eggs. No Wall Street protests of the kind in the US should ever be envisaged. Company income tax then was 40%, now 17%. The maximum personal income tax then was 55%, now20%.

(4) Moderation for Middle Income Groups

Four, those whose pay is between $1,500 per month and $15,000 a month will receive a quarter to a third of those less than $1,500 per month. A portion should still go to the much inadequate CPF Retirement Account.

(5) Government Co-Payment of SDF

Fifth, the state (or the Government) should contribute to the SDF on a 1 to 1 quid pro quo basis to demonstrate tripartite commitment, participation and responsibility in the new economic restructuring process.

(6) Involvement of NWC Absolutely Necessary

Six and lastly, like in Economic Restructuring I, the modus operandi of Economic Restructuring II, including the operational details, should be discussed and decided upon by the tripartite National Wages Council, which has to forge consensus by the three tripartite social partners, as in 1979.

Restatement of Objectives ER II

In other words, the basic objectives of Economic Restructuring II are (a) to check and to halt and if possible to reverse somewhat the disturbing increasing income inequality trend, (b) to increase productivity, total factor productivity, as a growth target and (c) to check and to halt the trend towards increasing reliance on very much cheaper imported labour to generate quantitative GDP growth. The overall objective must be, and should be, to enhance further the quality of life of all those who live and work in Singapore, and in particular, for those whose home and country is Singapore. With ER II, we will have a stronger, more robust, and more productive economy and a fairer, more just society. With ER2, hopefully, our very low and embarrassing Wage/GDP ratio can return to a less embarrassing position in three years.

Economic Restructuring Models I and II

Let me now put the first and the second restructuring model in a simple diagrammatic form to round-off this presentation. The curves in Diagram 7 are isoquant curves. They show factor proportions between capital and labour. The higher the curve the higher is the output. The model is not drawn to scale. Only inflexion years are shown. We moved successfully from 1979 to 1981 in the first restructuring exercise. We gradually changed our course after the economic trauma of 1985. If we continue at the present course without the slowing down or curtailment of lowly-paid foreign labour import, our GDP will take on the route of Transformation Curve A with all the negative implications on income distribution, increasing demand for public services, and congestion. If we restructure our economy following the first model, mutatis mutandis, our economy would move along TCB. I opt for TCB. TCB also implies a slight improvement to the Gini coefficient which, as has been stated, has shown a disturbing deteriorating trend. Economic Restructuring II, if successfully carried out, also means the lessening of the need for increasing taxation, including GST to meet the multifaceted needs for subsidies and transfers. Economic Restructuring II hits the basic ER problem on the head.

Restructuring Model I and II

TCA means transformation curve A

TCB means transformation curve B

Concluding Remarks

Finally, it is much more difficult to have national economic restructuring now than three decades ago. The politico-economic and the socio-economic environment have changed. But what has not changed, however, is that we still have effective tripartism and we still have a government and the civil service that are among the best in the world in cleanness, integrity and ability. Economic restructuring needs a national will. Do we have it now, as we had it then, a little more than three decades ago, but now, we are faced with a new set of economic problems, which may be called the problems of economic success? Previously, we called Growth with Equity. Now, we call Inclusive Growth. I have no doubt that Economic Restructuring II will bring Inclusive Growth to a more respectable and a more meaningful level. I recognise, however, that Economic Restructuring II as proposed by me is but one way of achieving the aims of Inclusive Growth, probably, in my view, the best way.

We were the first country in the world to have the then bold and iconoclastic Economic Restructuring I some 33 years ago and we will be the first country in the world now to have a formal Economic Restructuring II, also bold and iconoclastic and for another three years.